Real Yield at 2014 Low as India Sells Debt Quotas to Foreigners

  • Consumer prices rose in May at the fastest pace in 21 months
  • India to auction 81.14 billion rupees of quotas later Tuesday

Inflation-adjusted yields on Indian bonds have dropped to the lowest level since September 2014 before the nation auctions investment quotas to foreign funds.

The real yield on 10-year government debt has fallen one percentage point since April 1 to 1.63 percent, data compiled by Bloomberg show. Gains in consumer prices accelerated to 5.76 percent in May, the highest since August 2014. India will auction 81.14 billion rupees ($1.2 billion) of quotas to foreign investors later on Tuesday, enabling them to buy sovereign securities.

Rupee sovereign debt returned 2.7 percent in the April-June period, down from 3.1 percent in the previous quarter, indexes compiled by Bloomberg show. Foreign holdings of Indian government and corporate bonds slumped almost 150 billion rupees in the last two quarters, the most for such a period since the end of 2013, National Securities Depository Ltd. data show. India failed to meet its goal at a quota auction in May for the first time in three years.

“The uptick in inflation is a concern and investors are looking at it closely,” said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co., which oversees 9.9 billion rupees. “While the prognosis about monsoon rainfall is positive and is helping temper some concern, inflation is likely to go up in the near term.”

Investors have been drawing comfort from the forecast for the highest monsoon rainfall in 22 years, hoping that the June-September seasonal showers will boost farm output and curb consumer food prices, which rose 7.55 percent in May. Rains have been 2 percent below normal as of July 4, according to the weather department.

The 10-year yield has fallen eight basis points since March 31 to 7.39 percent in Mumbai on Tuesday, its lowest close since June 2013. That still offers an extra 600 basis points over U.S. Treasuries. The rupee snapped a four-day rally, retreating 0.3 percent to 67.4550 per dollar. The currency has weakened 1.9 percent in 2016, Asia’s worst performance after the Chinese yuan. Trading in Indian markets will be shut on Wednesday.

The Reserve Bank of India wants to limit price gains to 5 percent by March 2017. A strong monsoon, astute food management and increased supply of goods and services were needed to offset higher inflation, Governor Raghuram Rajan said on June 7 as he left benchmark borrowing costs at a five-year low.

Before it's here, it's on the Bloomberg Terminal.